Traditional IRAs vs. Roth IRAs: what’s the difference?

If you’re considering setting up a retirement account as an alternative to, or in addition to, an employer-sponsored plan like a 401(k), an Individual Retirement Account (IRA) is an option to consider. The most commonly used types are traditional IRAs and Roth IRAs, both of which have different advantages and disadvantages depending on the investor and their needs.

Understanding the differences between these types of retirement accounts can help you make informed decisions as you plan for retirement. Before you make any decision, you should speak to a tax professional to discuss which option is right for you.

In this article, we’ll provide information about what these two retirement accounts are and the differences between them to give you some background.

What is an individual retirement account (IRA)?

An IRA is a tax-advantaged investment account individuals can use to save for retirement. Unlike a 401(k) or 403(b) plan, which is employer-sponsored, IRAs let you set aside money on your own, which can be beneficial for individuals who are self-employed or have employers who don’t offer a 401(k) or another retirement plan.

Both traditional and Roth IRAs:

What’s the difference between a traditional IRA and a Roth IRA?

While both traditional IRAs and Roth IRAs are used to save for retirement, there are some key differences.

Tax advantages

Income eligibility

RMD withdrawal rules

Which is better: a traditional IRA or a Roth IRA?

Traditional and Roth IRAs have different tax advantages. Let’s dive into what they are.

Traditional IRAs

A traditional IRA may allow you to take advantage of the lower income taxes you’ll pay in the years that you contribute to the account.

A traditional IRA may make more sense if:

Roth IRA

A Roth IRA may be a better option under certain circumstances including if:

Can you convert a traditional IRA to a Roth IRA?

There are certain strategic reasons someone may want to convert a traditional IRA to a Roth IRA.

While not everyone can directly contribute to a Roth IRA due to income restrictions, there are no income limits for converting a traditional IRA to a Roth IRA. This is known as a “backdoor Roth IRA.” That said, tax implications, timing and legacy goals all play a role in understanding if a conversion is the right fit for you.

While you should talk to a tax professional before making a decision, here are some things to consider:

Your income

If your income exceeds a certain threshold, you won’t be permitted to make contributions directly into a Roth IRA.

However, there are no income limitations when it comes to converting a traditional IRA to a Roth IRA, which potentially is a way to fund a Roth IRA account even if you earn a high income.

Tax implications

Depending on the amount you choose to convert and your tax bracket, converting to a Roth IRA may result in a hefty tax bill the year you convert. This is because converting from a traditional IRA to a Roth IRA will generally mean you have to pay taxes at ordinary income rates on the amount converted in the year you do this. Once you convert, your contributions are made with after-tax dollars, however “qualified distributions” (as defined by the Internal Revenue Service) will be tax-free.

If you expect to be in a higher tax bracket in retirement, converting earlier rather than later and getting the tax payments over with may result in savings. So do the math: Compare the immediate tax bill from converting now (and the potential lost earnings on that tax bill) versus the projected overall income tax bill you’ll get once you are required to begin withdrawing in the future.

Also, consider how you’ll be paying the tax bill that will result from converting a traditional IRA. If you choose to use part of the converted amount for this, less money will be available to take advantage of the tax-free growth offered by a Roth IRA account. In addition, using converted funds to pay the tax bill could trigger a 10% early withdrawal penalty. The tax and penalty together, along with the lost earnings on these amounts, could end up costing you more than what you’ll save from future tax-free withdrawals. So again, it’s important to do the math and consider talking with a tax professional.

If you don’t convert, you’ll be required to withdraw regularly from your traditional IRA after you reach a certain age, and you’ll generally pay taxes on most of those required distributions (and most other withdrawals).

Timing

The “when” of the conversion can potentially cost or save you on taxes. So timing is everything.

For instance, if you know you will be moving from a low-tax state to a higher-tax state, it may make sense to convert your traditional IRA to a Roth IRA while you are paying taxes in the lower-income tax state.

If you don’t convert and you relocate to a higher-tax state, you may have to take distributions (or convert) in a higher-tax state and pay more in state income taxes.

If unforeseen circumstances leave you without a job for a while, this may push you to a lower tax bracket. Switching to a Roth IRA during this period may help decrease your tax bill at conversion before you move back into a higher bracket.

Charitable giving

If your long-term goals include giving to charity, a traditional IRA may be a better choice for tax purposes. Those with a traditional IRA can distribute up to $108,000 to charity tax-free each year starting at age 70 ½ as of 2025.

With this in mind, converting – and paying that big tax bill – may not make sense if your plan is to donate funds in your IRA to a nonprofit.

There are many variables to consider before taking action, so consider talking to a financial advisor and a tax professional to ensure you think through all of them.

The bottom line

An IRA may be an effective way to set aside money toward retirement. If you’re thinking of adding an IRA to your retirement strategy or looking for help with investing utilizing an existing IRA, a J.P. Morgan advisor can help.

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